Settling down with my usual bedtime reading last night – Austin Energy’s Annual Report of System Information – two tables caught my attention: the “Fuel Costs” (in total $) table on page 2, and the “Energy By Fuel Type”(in total MWh) table on page 3. Hiding in those tables are some meaningful numbers that refute the current thinking that with natural gas prices so cheap, nothing can possibly be cheaper. A little bit of math shows that renewable energy is an even cheaper option.
Tables From Austin Energy’s Annual Report of System Information
It’s unfortunate that the charts above didn’t compare the fuel costs of different resources on a relative basis, but we can do that by simply dividing the fuel costs by the energy from each fuel to arrive at a $/MWh value for each resource.
Environmental Defense Fund Calculations Based on Above Tables
When I did that, I found that on a $/MWh basis, Austin’s purchases of renewable energy in 2009 were still $5/MWh cheaper than gas, saving Austinites money even as natural gas prices were at historic lows. In 2008, when gas prices were higher before the recession, renewable energy was about $54/MWh cheaper. In the Texas grid (ERCOT), renewable energy almost always replaces natural gas in the “generation stack” so this adds up to a savings of about $50 million for Austinites in the last two years.
These calculations don’t include the additional cost to the utility of owning & operating the gas plants, which for the renewable energy purchase agreements are wrapped up into the “Fuel Cost” table. Including those values for a more “apples to apples” comparison pushes the price of natural gas up another $5-$6/MWh, further tipping the scales in favor of renewable energy in Austin.
Roger Duncan provided strong leadership during his time at Austin Energy by seeking out the meaning behind seemingly innocuous tables like these. His decisions lead to immediate savings for Austin customer and significant future savings as the cost of fossil fuels continues to increase. Hopefully city leaders will have the foresight to choose a general manager who can look past the bland numbers in annual reports like Roger did to see the real information: even with historic fossil fuel price dips during the worst recession since the Great Depression, renewable energy is still cheaper than fossil fuels.
40 Comments
Mr. Meehan,
I find this article quite misleading and taken out of context. Fuel costs are only a part of the expense related to energy production.
As you mention, there are also owning and operating costs. If these were included, the table would be called ‘production costs’ or ‘energy costs’, not ‘fuel costs’, which still sometimes don’t include the construction cost.
To further highlight the misleading ‘out of context’ example you used, I note that you did not highlight coal or nuclear fuel costs that are significantly cheaper than renewables.
Renewable energy plants are typically very expensive to construct and operate. Primarily because of their technology and smaller scale.
I do support a mix of energy sources including renewables and a long term view and protection of the environment. However I am very concerned that you misrepresent and state that this has a financial savings, when in fact it has a cost.
That ‘cost’ may be worthwhile and is certainly noble, but please allow your readers to make educated decisions on all the information, not on items taken out of context.
Regards,
Don
Don, thanks for your thoughtful reply, I’m sorry if you feel my post is misleading, however I disagree. I think the confusion may arise from my attempt to fit a pretty complex discussion into a relatively short blog post. It certainly is not my intent to mislead on this issue and I feel the facts from Austin Energy’s annual report lead directly to the conclusion in my post.
What’s more, I am not the only one that feels renewable energy has and continues to save money for Texans. The Texas Public Utilities Commission (PUC) in their 2009 Scope of Competition Report found that wind has saved Texans a substantial amount of money. Several studies from Electric Reliability Council Of Texas (ERCOT) have concluded the same and that those savings will continue and grow as renewable energy grows in Texas. As always I hope that my readers have a chance to look at the full discussion and to judge the facts for themselves and I’m glad you’ve given me the chance to elaborate a little.
You are certainly correct that fuel costs are only part of the expense related to energy production, however Austin Energy currently produces no renewable energy of its own. Instead Austin Energy signs “purchase power agreements” (PPA’s) or long-term purchasing contracts with renewable energy developers that roll in the cost of owning and operating the renewable energy into what is described as the “fuel cost” in Austin Energy’s Annual Report. In fact, as you may know, all of the renewable energy that Austin Energy currently purchases uses no fuel and has a zero “real” fuel cost.
As a result the comparison between the fuel costs of natural gas and the PPA costs of renewable energy is a valid one, and if anything that comparison should favor natural gas as I state in my post. Since Austin Energy owns and operates its natural gas plants, the utility does bear those costs as well which are not represented in the “fuel cost” portion of their tables. As we can see though the cost of fuel alone for natural gas is so high that it is more expensive than the cost to renewable energy developers that Austin Energy contracts with.
Perhaps I was unable to fully explain this rationale in a short blog post, and I realize that I didn’t delve too much into the issue of why comparing renewable energy to coal or nuclear would be in fact misleading. There are a few very good reasons such a comparison would be inaccurate:
First, since the current coal & nuclear power plants owned by Austin Energy are mostly if not fully capitalized, it is misleading to compare the costs of owning those resources to the costs of owning or having PPA’s for newly built renewable energy. A more equitable comparison would be between the costs of a renewable energy PPA and the costs of a new coal or nuclear power plant, although to date those costs have been very hard to pin down and continue to grow rapidly. Second, as I stated in my post renewable energy in Texas overwhelmingly displaces natural gas, which as I have shown is a more expensive alternative to renewable energy.
I hope you will take the time to read the reports from the PUC and ERCOT, as well as the myriad other examples of the ways in which renewable energy has saved Texans money. It is a common misconception that renewable energy can only come at a cost, but the weight of all of these reports largely refutes that idea. In my post I’m merely trying to underscore the conclusions that are inherent in the most recent report from Austin Energy.
Great post and response. Don, I just wanted to elaborate a bit on Colin’s point that renewable electricity typically displaces natural gas rather than coal and nuclear. I’m no expert, but this is my understanding at least.
As electricity demand changes over time, production from each source is adjusted to meet it. However, the flexibility of each fuel type depends on how quickly it can be turned on and off. Nuclear plants take a very long time to power up or down so they are almost never adjusted. Coal plants take a significant amount of time as well. Natural gas turbines, however, take only a matter of minutes. Therefore, they are the last to be turned on as demand rises, and the first to be turned off if renewable electricity is purchased from the grid. Also, since natural gas is most expensive per MWh, it makes sense financial sense to displace NG production with renewables first.
Of course, these are generalizations, but as Colin said, I believe they hold in Austin.
Since wind tends to blow as much or more off-peak than on-peak, the use of wind tends to displace coal off-peak. A comparison of wind to natural gas prices therefore is highly misleading.
Seems to me this is an empirical question. When renewable energy is purchased from the grid in Austin, what percentage of the time does it displace natural gas or coal? Do we have data on this? If so, you could easily weight the calculations depending on what percentage of renewables goes towards displacing each fuel type.
You’re right Joe, unfortunately this data is harder to come by than I’d originally thought. I had an excellent discussion with Dr. Baldick about his comment though and it turns out we’re more in agreement than it might seem. Our conversation ran on so long and covered so much ground (including why Dr. Baldick sees low off-peak wind prices driving new coal plants out of the market) that I think this whole part of the discussion warrants a more in depth post. Look for it in the next few days, and thanks all for taking the time to read and comment on our blog, I’m really enjoying the conversation and thoughts from others.
When the PTC credit (a $20/MWh subsidy of wind power) expires, won’t wind energy be the most expensive source?
Scott, a good question, the Production Tax Credit (PTC) has done an excellent job of promoting wind power in the U.S., and many people feel it is responsible for the negative pricing we sometimes see in West Texas. Since wind generators have almost zero marginal cost they are willing to generate at whatever price will provide them with a net profit. In the case of the PTC this means they can generate with prices almost as low as -$20/MWh (i.e. they are paying the grid to take their power). Without a PTC however wind will still offer in at the lowest part of the bid curve, at or just above zero.
On a capital cost basis wind energy will likely be more expensive than a gas power plant, but if gas prices recover to $6 or $7 the costs of a wind power plant are likely to be cheaper than a gas power plant spread out over the long term (20 years or so) with or without subsidies. A coal plant operating at full capacity 80% of the time or more is likely to be more cost competitive with wind, but since wind energy has a much lower marginal price it is likely to undercut coal during “peak wind” hours of the day. Since coal plants will be running less often as a result the economics may not work out as well for them according to a study from Dr. Baldick mentioned above. I’m working on a post relating to all this and hope to have it up today or tomorrow, so come back soon!
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